Assessing the probability of bankruptcy

Stephen A. Hillegeist, Elizabeth K. Keating, Donald P. Cram, Kyle G. Lundstedt

Research output: Contribution to journalArticlepeer-review

656 Scopus citations


We assess whether two popular accounting-based measures, Altman's (1968) Z-Score and Ohlson's (1980) O-Score, effectively summarize publicly-available information about the probability of bankruptcy. We compare the relative information content of these Scores to a market-based measure of the probability of bankruptcy that we develop based on the Black-Scholes-Merton option-pricing model, BSM-Prob. Our tests show that BSM-Prob provides significantly more information than either of the two accounting-based measures. This finding is robust to various modifications of Z-Score and O-Score, including updating the coefficients, making industry adjustments, and decomposing them into their lagged levels and changes. We recommend that researchers use BSM-Prob instead of Z-Score and O-Score in their studies and provide the SAS code to calculate BSM-Prob.

Original languageEnglish (US)
Pages (from-to)5-34
Number of pages30
JournalReview of Accounting Studies
Issue number1
StatePublished - Mar 2004
Externally publishedYes


  • Bankruptcy prediction
  • O-Score
  • Option-pricing models
  • Z-Score

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)


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